Inventory
Inventories are the products that are purchase or produce for sale purpose. It also include the raw material that is purchase for production purpose
Inventories are the products that are purchase or produce for sale purpose. It also include the raw material that is purchase for production purpose
Objective,
The objective of this standard is to prescribed the accounting treatment for inventories. a primary issue in accounting for inventories is the amount of cost to be recognized as an asset and carried forward until the related revenues are recognized. the standard provides guidance on the determination of cost and its subsequent recognition as expense. Including written-down to net releasable value.
Scope of inventory
IAS2 apply only on the products that are purchase for sale purpose and raw material for production purpose.
Sometime other section of IAS2 are apply i.e. IAS11, IAS39, IAS41 etc.
Cost of inventories
Cost of inventories
All costs that are paid to take the goods into the godown i.e. rent , labor, tax etc.Losses are not include into the inventory cost i.e. abnormal loss, loss of inventory,forgien exchange difference etc.
Inventory system
There are two inventory systems that are used to record inventories.
1.priodic inventory system
2.perpatual inventory system
1.Periodic inventory system:
In periodic system when we purchase goods than debited the purchase account.
2.perpatual inventory system: in perpetual system we debited the inventory account.
Methods to record inventories
There are three methods to record inventories
1.AVERAGE MATHOD
2.FIFO MATHOD
3.LIFO MATHOD
Average Cost Method
When using average cost, assign the average cost of the goods available for sale to cost of goods sold. The average cost is determined by dividing the cost of goods available for sale by the units on hand.
First-In-First-Out Method
The first in first out method, often called FIFO, is based on the assumption that the first merchandise purchased is the first merchandise sold. The distinguishing characteristic of the FIFO method is that the oldest purchase costs are transferred to the cost of goods sold, while the most recent cost remains in inventory.
By assigning lower cost to the cost of goods sold, FIFO usually causes a business to report higher profits then would be reported under the other inventory evaluation methods. Some companies favor the FIFO method for financial reporting purposes, because there goal is to report the highest net income possible.
Last-In-First-Out Method
When using the Last-in, First-out (LIFO) method, we assign the most recent costs to the units sold. That leaves the older costs to be used to value ending inventory. Life method is one the most interesting and controversial flow assumption. The basic assumption in the life method is that the most recently purchased units are sold first and that the older units remain in inventory. This assumption is not in accord with the physical flow of merchandise in most business. Yet there are strong logical arguments in support of the life method, in addition to the income tax considerations.
